PREFACE Preface During my 30 years with PwC in New York, I was privileged to have served as the global tax partner on a number of large multinational clients, enabling me to travel to many parts of the world. Over the years my fascination with South East Asia grew to the point that I decided in 2009 to relocate and finish my career in the region. I had long thought SEA had tremendous potential. But after moving here, travelling extensively throughout the region and getting to know it first hand, my fascination has turned in to admiration. I am astounded by the dynamism of the region and by its people, their drive to achieve and improve. SEA is truly a remarkable place. Thus, on behalf of the PwC member firm partners and staff of SEA, I hope that you will share my enthusiasm and hopefully this publication will help you to both know the region better and highlight the many opportunities in SEA. Greg Lamont Editor PwC Thailand September 2012 Note – The information on incentives and benefits is current as of September 2012. However, from time to time countries enact modifications so please check with the listed PwC country contacts for the latest information and to determine if there have been any changes (especially Myanmar which is currently in the process of revising its foreign investment law). Additionally, a number of countries offer other non- tax incentives for SMEs which have been left out of the discussion. CONTENTS Contents Perspectives on South East Asia 1 ASEAN and AEC 2015 11 ASEAN and Free Trade Agreements 15 Cambodia 21 Indonesia 29 Laos PDR 37 Malaysia 43 Philippines 55 Singapore 67 Thailand 83 Vietnam 101 Myanmar 115 Sources and Acknowledgements 122 Other PwC information on SEA 124 Perspectives on South East Asia Perspectives on South East Asia Though in recent years much attention has been focused on the so-called BRIC countries, the ‘Asian Tigers’ are now once again demanding renewed attention. But the Asian Tigers currently roaring are not the same ones as in the 1990s when the term was coined. Many of the tiger cubs of the 1990s are now fully grown and new cubs are growling. While most Multinational Corporations (MNCs) have for the past decade been focused on China and India, due to both their immense populations and low costs of production, a shift of focus back to South East Asia (SEA) is growing and gaining momentum. China’s vast potential is seen as diminishing. Its wage scales have been rapidly increasing, making it no longer the centre of low-cost production that it was in the past. In addition, protectionist measures that have favoured domestic companies have further blunted China’s advantages. Intellectual property protection is an ever increasing concern of MNCs in China. India too has not lived up to expectations. Its infrastructure continues to be a major challenge. In addition, its continuing and seemingly increasing bureaucratic restrictions on business and investment, as well as very uncertain tax policy, have continued to lessen its allure. SEA continues to be a bright spot in an otherwise dim global economy. As the US continues to limp out of recession, and the EU continues to deteriorate, SEA is a rising star of the global economy. The ASEAN (Association of South East Asian Nations) countries merit both new and increased attention of MNCs. Multi-faceted economies, culturally diverse and highly populated with vast potential — that is SEA. The region’s potential is hard to ignore — strategically located at the centre of Asia Pacific, these countries’ economies are driven by the growth of China and India, but also more and more by the phenomenal and dynamic demands of the region’s own large populace. The region has experienced growth rates in recent years that are the envy of the West. GDP Growth 1 South East Asia Investment Opportunities – Tax & Other Incentives Demographics SEA is home to nearly 9% of the global population. With a combined population of over 600 million people, it is not as large as China and India, but easily dwarfs the US and Europe. Population Population in millions Certainly population size alone is not the whole story, but merely one element in a larger picture. Attractive labour costs are perhaps the most obvious draw. But as SEA continues to emerge and evolve, further scrutiny reveals another significant factor for growth. While many of the countries in SEA have long been viewed as low-cost production centres, an important shift has been under way for a number of years. That shift, from commodity- and manufacturing for export-driven economies, to consumer economies continues to accelerate. Many SEA countries have been extremely successful in reducing poverty, enabling more people to consume goods and services that transcend basic needs. There is significant upward mobility of the population, a burgeoning middle class that is gaining in size and wealth, stoking demand for consumption of goods and services. Disposable income continues to rise across all segments of the population in each country. This trend is poised to continue across SEA. Ever greater spending power will support demand for services and higher value-added products. Clearly this creates a dual advantage for SEA, continuing to be a low-cost production centre, but also a bloc of over 600 million consumers eager to spend. Consumers across SEA are becoming more sophisticated and embracing technology. This is evidenced by the increasing use of mobile devices and the Internet. 2 Perspectives on South East Asia Mobile Phones Subscribers in Penetration % Millions Cambodia 8.1 130 Indonesia 309.2 126 Laos 3.2 N/A Malaysia 38.9 132 Myanmar N/A N/A Philippines 102.3 106 Singapore 8.2 154 Thailand 77.4 105 Vietnam 122.3 136 Internet usage is growing rapidly, especially mobile Internet, as more and more of the population can afford so-called smart phones. iPhone, Galaxy, and Blackberry make up the vast majority of new phone purchases in most of SEA. Internet (in thousands) Internet Facebook Users Users Cambodia 615 572 Indonesia 55,000 43,976 Laos 527 195 Malaysia 17,723 12,462 Myanmar 110 N/A Philippines 33,600 28,547 Singapore 3,658 2,610 Thailand 18,310 15,501 Vietnam 30,859 6,032 While e-commerce is still in its infancy in most of SEA compared with North America and Europe, it is increasing rapidly and has the potential for explosive growth, marrying Asians’ dual loves: technology and shopping. Though it would be naive to think that SEA can be immune to the financial and economic crises of the EU and the anaemic North American economy, the rise in consumerism in the region clearly provides a new degree of insulation. 3 South East Asia Investment Opportunities – Tax & Other Incentives Low Costs are Still a Main Attraction Despite the rise in consumerism, the principal attraction of the ASEAN countries has historically been, and continues to be, their low costs of labour. The impressive economic growth of the SEA nations over the past three decades has been catalysed by local companies and MNCs capitalising on this low-cost labour. SEA will continue to reap the benefits of its competitively priced labour pool, which is expected to endure as the region’s greatest asset for the foreseeable future. Average Manufacturing Wages Monthly in USD Cambodia 101 Indonesia 182 Laos 45 Malaysia 666 Myanmar N/A Philippines 212 Singapore 1,639 Thailand 263 Vietnam 107 Minimum Wage Monthly in USD Cambodia 43 Indonesia 132 Laos 64 Malaysia N/A Myanmar 17 Philippines 181 Singapore N/A Thailand 79 Vietnam 49 Wage rates, however, are just one factor in the total cost of employment. In Western countries, social taxes and mandated fringe benefits add considerably to overall employment costs. The SEA countries are also remarkable for their low levels of social taxes, adding considerably to their cost competiveness. In most ASEAN countries the social tax percentage is less than 5% and the maximum caps 4 Perspectives on South East Asia are set quite low. For instance, in Thailand the maximum employer’s social security contribution is about USD15 per month and that is on a relatively high wage base. The SEA nations enjoy low unemployment rates, especially in comparison to the EU and the US. Unemployment Rate Projected 2011 2012 Cambodia N/A N/A Indonesia 6.6% 6.4% Laos N/A N/A Malaysia 3.2% 3.1% Myanmar 5.5% 4.02% Philippines 7.0% 7.0% Singapore 2.0% 2.1% Thailand 0.7% 0.7% Vietnam 2.3% 4.5% However, even with these low unemployment rates, the region enjoys the advantages of a large and growing labour pool, high birth rates, and a relatively young population, ensuring ample new workers joining the work force each year. Age Structure 5 South East Asia Investment Opportunities – Tax & Other Incentives Median Age Cambodia 23 Indonesia 28 Laos 21 Malaysia 26 Myanmar 26 Philippines 23 Singapore 40 Thailand 34 Vietnam 28 Another compelling factor is the region’s highly skilled labour force. Countries in SEA have experienced steady increases in adult literacy rates over the past three decades. All of the governments in the region are committed to further increasing budgets and spending on education, knowing that an educated work force is one of the key elements for sustaining economic growth and stability. Literacy Rates (age 15 and over who can read and write) Labour costs are not the only cost advantage of the region. The costs of business operations overall are significantly lower; substantially lower than in the West, as well as in comparison with other Asian locations such as China, Hong Kong, Japan and others.